Be careful what you wish for… High grain prices impact more than corn farmer’s wallet

(Reporters Kristy Foster and Chris Kick compiled this report. Also, this item was updated to note the repeal of a 1099 requirement originally reported.)

SALEM, Ohio — The close of 2010 saw grain farmers across the nation still reveling in near-record prices from the fall harvest. And as we enter a new year and a new decade, indications show the best is still to come.

But experienced farmers know, it won’t just be grain prices that go up. What will it mean for seed and fertilizer? Or how about crop insurance, and fuel? And what about food costs and livestock feed?

We’ve asked farmers and researchers across the Midwest to take a look into the future, and what they see is full of excitement, challenges and some lessons to be learned.

Grain farmers, blessed or cursed?

If you’re selling grain into 2011, then you’re celebrating record prices and profits, right?

Not necessarily. What would appear to be the grain farmer’s dream-come-true is full of caveats.

High input prices top the list of worries, as fertilizer and seed costs will likely post significant increases.

Barry Ward, an ag economist with Ohio State University Extension, says OSU Extension budgets show variable corn production costs will be 16 percent higher than in 2010, and soybeans will cost 13 percent more.

“Higher commodity prices and higher costs lead us to a riskier production year, as the cash investment in an acre of corn will top $350 and in some production scenarios be closer to $400 per acre,” Ward said in a released statement. “The cash investment in an acre of soybeans will be in the $200 range.”

But he predicts strong profitability prospects for Ohio’s main row crops, because commodity increases are well ahead of inputs.

Speaking at the Ohio Grain Farmers Symposium in December, Steve Beier, of The Andersons Grain & Ethanol Group, said grain farmers have a lot of opportunity in 2011, if they use the safety tools available.

Among them — crop insurance and a sensible marketing strategy. With so much on the table, in terms of input costs and higher crop value, farmers need added protection for what’s in the field.

“You’re going to pay to play,” he said, referring to the need to insure investments. “The first step in protecting (revenue), I think, is a quality crop insurance policy.”

Volatility will soar this year, he predicts, and “crush” marketing plans that are unprotected.

“So, you need to spend a little money to take that volatility out, so that you don’t have to be all right or all wrong in this market,” he said.

Word has spread corn could reach as high as $9 a bushel, but farmers who wait for that may end up with much less.

“If you go for that $8-9 corn, you might get $4 corn, and you’re not going to feel good about that if you had a shot at $6 corn,” he said.

“Be careful what we wish for,” he said. “We could see eight-dollar corn, we could see nine-dollar corn. I’m going to challenge you that if we see that kind of an environment, it’s going to put a lot of stress on the industry.”

Land prices and land rents

It’s no secret grain prices affect land values, and for farmers this means higher land prices to be paid for new ground, and higher rents.

Barry Ward, Ohio State University ag economist, said surveys show continued strength in land sales, and sales have been very strong at auctions across Ohio. But because grain prices have been so strong, Ward added, farmers have money to invest in addition to many paying cash for land.

He said land is an asset and many farmers can make more profit purchasing land than they can off the interest gained in the bank.

Other farmers realize land is not an asset that comes available often, which can also contribute to higher land prices.

The downside is outside, nonfarm investors are also realizing that land can be a better money maker than CD’s or other investments.

Ward said that farmers who haven’t seen price adjustments in rent since 2006 or 2007 will be in line for a market adjustment this year.

However, other farmers who had their land rents adjusted in 2008 may not be able to sustain those land rent amounts depending on future grain prices.

Ward said landowners aren’t as quick to lower cash land rents as they are to raise them, but those charging higher cash rents will need to be flexible. If crop prices fall and inputs increase, then adjustments will need to be made the other way.

Record exports, income potential

The past year saw farm income recover from double digit declines in 2009, and with trade exports as high as they’ve been, there’s good reason to believe income and cash receipts will be high in 2011, as well.

In a conference call with media in December, U.S. Secretary of Agriculture Tom Vilsack said net farm income for 2010 was expected to rise nearly 34 percent from the previous year, just under 30 percent above the previous 10 years.

“According to today’s numbers, farmers are earning more for their products than they made last year, and that’s making a real difference for American farm families whose household income overall is set to rise by nearly eight percent over 2009,” he said.

Vilsack said one of the most important driving factors is increased exports to other nations. Reports show the U.S. is on track to set an all-time trade record of $126.5 billion, exceeding the previous record of $114 billion, set in 2008.

“Agriculture continues to be one of the major sectors of the American economy that has a trade surplus,” he said. “Based on our projections, we’re looking at a $41 billion surplus in this fiscal year. Obviously that not only means better incomes for farmers, ranchers, and growers, but it also means more job opportunities for Americans.”

The secretary said the United States is experiencing “surges” in sales in China, Southeast Asia, North America and the Middle East. Chinese officials recently signed “a very large soybean contract,” he said, and soybean exports are forecast to be up by more $5 billion, due in part to the demand in China and in the European Union.

He spoke optimistically about trade arrangements in Asia, especially with China, which has increased from $2.5 billion to $17.5 billion. It’s “an important number,” the secretary said, because “it’s only half-a-billion dollars less than Canada, our number-one trading export partner.”

Catch-22: Ethanol boosts corn demand, but high prices shutter facilities

Ethanol production uses more and more corn each year, as the industry works to meet the government-mandated levels of corn-based ethanol production.

Production figures from mid-December showed ethanol producers were using 14.207 million bushels of corn daily.

According to Renewable Fuels Association CEO Bob Dinneen, the U.S. ethanol industry produced nearly 13 billion gallons in 2010, the most ethanol ever produced. That also translated into a byproduct of 9 million metric tons of distillers dried grains, or DDG, also a record.

But climbing corn prices have halted work on ethanol plants under construction or on the drawing board. Still, according to Robert Wisner, biofuels economist at Iowa State University, ethanol production is expected to use 8.8 percent of U.S. corn production in 2011.

Ethanol producers don’t shoulder the complete cost of production, but get a tax credit of 45 cents per gallon, which was extended in the lame duck session of Congress.

Feeding livestock will cost more

If you’re planning to feed grain to your livestock this year, then plan on paying more. Prices are headed up, and if you’re buying, then it’s going to hit you in the pocketbook.

“Tight financial management will be the norm for the first half of 2011,” said Normand St-Pierre, dairy specialist for Ohio State University, in his December Buckeye Dairy News column.

Just as dairy prices began to recover, they’re now showing signs of going the other way, at a time when the cost to feed cows and heifers is on the rise.

“Feed prices have gone through the roof, and the November decline in milk prices is just the beginning of further declines based on the current cash prices of butter and especially cheese,” St-Pierre said.

Dairy economists at the University of Missouri expect milk prices in the new year to average only $15.75 per hundredweight, down sharply from $18 in the last quarter of 2010.

“The combination of low-price milk and high-cost feed makes for break-even margins at best,” said Scott Brown of the MU Food and Agricultural Policy Research Institute.

And, it won’t just be dairy farmers who are affected; essentially, anyone who feeds grain or grain-based feeds will get hit.

“Crop markets will likely be especially focused on evolving crop conditions that will have a large impact on overall feed grain price levels as well as increased volatility from the pre-planting period through harvest,” writes Derrell S. Peel, marketing specialist with Oklahoma State University Extension. “Crop prices and volatility will continue to have a big impact on livestock industries in general and in cattle, especially on the feedlot sector.

Incentives to rebuild the U.S. cattle numbers are high, including near-record prices paid for feeder calves. But, as Peel frankly puts it, “high and volatile input costs” could easily “offset some of the incentive of higher cattle prices.”

Crop insurance headed up, too

Just as grain profits increase, crop insurance premiums may also increase.

Galen Kopeke, a farmer and owner of Kopeke Insurance, and Jason Williamson, of the Williamson Insurance Agency, said crop insurance is changing for 2011, and that means changes for farmers — not in protection, but in terminology for the coverage they purchase.

A long story made short is that if grain prices hold high through February, then farmers can expect an increase in crop insurance premiums.

Revenue protection is popular with most farmers. It insures them against yield loss and market price drops.

Farmers can purchase it based on their average yield over a 10-year period. The insurance can be purchased for between 50 percent and 85 percent of their average yield.

The premiums are set according to the average grain (soybean or corn etc.) price set by the Chicago Board of Trade in February.

The next factor in determining a farmer’s premium is what they call the volatility factor, or the volatility in the marketplace.

However, if a higher price is paid during harvest time, like 2010, then a farmer will get the indemnity paid out for the revenue loss. One thing to remember, both crop insurance agents cautioned, this October was rare because the price at harvest was high, and it almost always goes down during October.

The tax man cometh

Higher grain prices means higher income, which means higher income taxes for farmers. Not what many want to hear, but unfortunately it’s the truth.

Gary Hoff, University of Illinois professor specializing in rural taxation, recently held a webinar through Ohio State University helping farmers sift through some of the tax laws.

Farmers will need to get their 1099 forms in order in 2011, otherwise the penalties will be felt in the pocketbook.

Hoff said each vendor a farmer uses as a tax deduction will need to have such a form on record. Even if a farmer has used a fertilizer vendor for years, a form will need to be on record if the deduction is taken on taxes. The forms must be filed from each vendor for a purchase over $600. (Editor’s note: This requirement was repealed in April 2011.)

Also consider expensing. The amount will be increased to $500,000 for 2010 and 2011. The phaseout begins at $2 million.

And little things are big things. Cell phones, which many farmers need for farm use, are also a valid deduction but need to be listed properly on the tax form.

Hoff cautioned all farmers that the Internal Revenue Service is ramping up audits, going under the assumption that some farmers under-report income.

He said another thing to consider is deferred payment contracts. But don’t think the IRS won’t be looking for that income. The IRS will be checking for written contracts, when the farmer is to receive payment and when was it signed.

It’s too late for 2010, but consider making purchases that can be used as deductions by the end of a year — seed for the next year, a combine, or even drainage tile.

Food costs going up

Whatever you eat, it’s likely to cost more in 2011, as grain prices are forecast to continue climbing, and so will the cost to produce food for the dinner plate.

For the past 14 months, retailers have been absorbing a good portion of the price increases they’ve seen, according to The Food Institute CEO Brian Todd.

But that’s expected to soon end, and when it does, it could send home food prices up 2-3 percent or more.

The Food Institute says feed corn prices are projected to increase as much as 58 percent over the close of 2010, and the new year.

Corn used for livestock feed has actually decreased, but ethanol usage is up considerably, about three-times as much as the 1.6 billion bushels used in 2005-2006.

In the same period, corn has gone from $2 a bushel, to $3.55 a bushel last year, and as high as $5.60 for the current market season.

“That’s a substantial jump in price and is also being passed along to consumers via meat prices,” the Food Institute says. “Both beef and pork prices are up this year over last and are seen increasing again in 2011 as a result.”

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